20 Nov 2012

OWNERS ASSOCIATION BOARD MEMBERS – DOES THE BUCK STOP WITH YOU?

Authored by: Brent Baldwin

The Tamweel Tower fire in Jumeirah Lakes Towers this week illustrates a serious situation that Owners Association Board members may have to deal with in their communities. In another recent example, a major piece of external cladding in a different Dubai apartment community was ripped off in high winds. Thankfully no serious injuries have been reported in either of those cases, but the potential seriousness of these events and the myriad of other issues that can arise in large scale residential and villa communities raise a number of questions regarding who may be liable, whether it could have been prevented and who helps deal with the matter afterwards. Can any Board members say with a high level of confidence that their Boards are prepared to deal with such situations?

The general intention of Law No.27 of 2007 concerning Jointly Owned Properties in the Emirate of Dubai and its related Directions (“JOP Law”) is to create a regulatory structure that makes Owners Associations the cornerstone of Dubai jointly owned property communities. If working properly, the functions of an Owners Association should include:

Bringing order and continuity to the community;

Maintaining the Common Areas;

Preserving the architectural integrity of the community buildings; and

Fostering the long term value and amenity of the community, which will hopefully maintain and increase property values in the long term.

The JOP Law requires every owner in a jointly owned community to become a member of the Owners Association. With such membership comes financial obligations (i.e. payment of service and other related charges), maintenance obligations (keeping their own unit in good order) and compliance with the Community Rules.

The Dubai real estate market is still in a transitional stage in relation to Owners Associations taking over responsibility for jointly owned property communities. In some cases developers seem to be proving resistant to handing over full control. In other cases there is still a lack of clarity regarding the legal standing of Owners Associations, and where the lines of liability are drawn between a developer and the owners.

Despite this, the jointly owned property market is continuing to evolve and in light of high profile issues such as those described above it is timely to consider the current and future liability of Owners Associations for issues that occur within their communities, and especially the obligations of Owners Association Board members.

As owners in many jointly owned property communities will already be aware, due to the number of decisions that need to be made by an Owners Association and the large number of owners, the JOP Law contemplates the election of a Board to which a number of management decisions are delegated. Currently all appointed Boards in the Dubai market are still only acting in an “interim” capacity, but even so Board members should be turning their minds to what happens when something goes wrong, and whether Board members may be liable for their actions (or failures to act).

Generally a Board should act in a consistent and uniform way that enables the community to be fairly and appropriately managed. There are however, provisions in the JOP Law that place specific obligations on Board members. In particular, Schedule 1 of the Direction for Association Constitution prescribes a Code of Conduct. Some of the obligations specified in the Code of Conduct include that:

“A Board member must be committed to understanding the role of the Owners Association and the rules by which it operates…and

A Board member must not…otherwise behave in any way that unreasonably affects a person’s lawful use and enjoyment of a Unit or the Common Areas.”

Although on the face of it these obligations appear straight-forward, Board members need to ask themselves if they are genuinely carrying out their responsibilities in a way that satisfies these criteria. Our observation of the (albeit still maturing) jointly owned property market is that many Board members believe that once an Association Manager is appointed their responsibilities are limited to ensuring service charges are kept to the minimum reasonably possible and appropriate.

Bearing in mind that Board members are not paid for their services and that Association Managers are, and that arguably the Code of Conduct for Association Managers specified in Schedule 2 of the Direction for Association Constitution is more onerous than that applicable to Board members, this attitude may be reasonable to a degree. Board members should understand however that delegating their responsibilities to an Association Manager may not necessarily be enough to satisfy their obligations under the Code of Conduct. We recommend that Board members familiarise themselves with the responsibilities they owe to the other owners in their communities.

As mentioned at the beginning of this article, some elements of the JOP Law including the practical manner of transition of control from developers to owners in certain developments, the legal standing of Owners Associations and liability of owners and Board members remain unclear. It is not the purpose of this article to discuss the legalities of those issues. The purpose of this article is to suggest that agreeing to act as a Board member on their Owners Association requires Board members to take proper responsibility for their role, but in a way where they also protect themselves. As more certainty creeps into the market about the application of the JOP Law, there may be legal consequences in the future if Board members fail to meet their obligations or are deemed to have breached the Code of Conduct.

In many ways, acting as a Board member is similar to being a Director of a company. Fundamentally a Board member’s job is to act in the best interests of their Owners Association. Even if an Association Manager has been contracted to take responsibility for the day to day management of a community, Board members still need to take responsibility for matters such as properly assessing the tenders for community services (and not just taking the view that the cheapest is necessarily the best), keeping an eye on the performance of the Association Manager, checking the status of collection of service charges and making decisions about what community services may be cut in the event of a budget shortfall, ensuring their building has adequate insurance coverage, satisfying themselves that essential services (e.g. fire systems) are working properly and a range of other matters.

Decisions made by Board members can have far-reaching implications. Insurance for example, is likely to continue to be a problematic area. Board members should familiarize themselves with the insurance policy for their community and ensure that everything owners expect to be covered is actually covered, for example fire and water damage. Board members should not consider they have done their job just by choosing the company with the lowest premium. We recommend Board members also consider the long term value and amenity of their community. Short terms cost savings may cost owners more in the long run, both in actual costs and reductions in property values and desirability. Board members need to take an active interest in their community by driving and guiding policies and the Association Manager. Furthermore in developments where the developer still exercises control, interim Board members should not allow themselves to be used as a “rubber stamp” for decisions made by the developer that owners may object to later. Boards should fully document all decisions they make and take legal advice if they have any concerns.

These can be onerous and time consuming duties. Board members should not however assume the presence of an Association Manager automatically excludes them from liability if something goes wrong. Although the application of such legal principles to Board members is not yet fully tested or developed, Federal law does specify minimum duties of care for those charged with responsibilities that may cause harm or loss to others. By following the general principles described above and taking advice when necessary, Board members can minimize their risk. It would also be prudent for Boards to take out insurance to cover their role and responsibilities; however this is unlikely to be possible while they are still in an interim phase.

Acting as a Board member carries with it responsibilities that are very similar to running a business. While being an opportunity to serve their community and enhance the value of their asset and desirability of their community, Board members should also take care to ensure they protect themselves by taking an active interest in all community matters. Boards should ensure they hold (and attend) regular meetings and ensure any decisions made by the Board are properly documented and should also discuss with their insurer whether they are able to take out Board members liability insurance. If in doubt, Boards should take legal advice before making a decision that may have adverse consequences later.